India proposes compensation for renewables curtailment

The Indian Power Ministry has put forward plans to compensate for grid curtailment of existing renewable energy projects, according to credit rating agency India Ratings and Research (Ind-Ra).

This would protect the cash flows of developers and would come as huge comfort to the industry, especially given that curtailment is expected to become a serious bottleneck in the next 18 months. The threat will grow as renewables penetration increases and if the environment of financially struggling distribution companies continues.

For example, curtailment has affected the state of Tamil Nadu for some time now, yet despite its reputation for this combined with payment delays, the Tamil Nadu Generation and Distribution Corporation (TANGEDCO) still recently announced a tender for 1,500MW of solar through reverse auction, with project sizes capped at 500MW.

So far in the case of curtailment, developers have bridged any cash flow shortfall in debt service through tapping debt service reserves or drawing working capital limits or sponsor support, said Ind-Ra.

The proposed compensation provisions would only apply projects that provide day-ahead forecasting and scheduling, but it has been suggested that such a compensation mechanism should be applied in the power purchase agreemtn (PPA) provision for future projects.

Under transmission constraints, the proposed framework would involve compensating 50% of the energy at the contracted price for curtailments of more than 2%. The level of compensation for curtailments of more that 7% will also require a review by stakeholders.

Curtailments due to grid security issues will not involve compensation. Meanwhile, curtailment as a result of low system demand will involve a INR0.5/kWh (US$0.008) compensation, after curtailing of conventional generators has been carried out up to technical minimum limits. However, Ind-Ra noted a lack of clarity over determining what will count as a low system demand incident.

Ind-Ra also cited an overall lack of clarity in the Ministry of Power compensation proposal and a failure to define its terms in full.

Indian solar tariff records were broken recently at the 750MW solar park at Rewa in Madhya Pradesh partly due to provisions in the PPA framework that protect against curtailment. The proposals could therefore give some added confidence to the sector, particularly at a time of uncertainty around the GST tax Bill.